The Role of ISDS in Promoting Environmental Policy


Carolina Reaper. Courtesy of Wikimedia.

International environmental regulations and international investment law have traditionally been conceived of as incompatible. Investment arbitration has been used by affected foreign investors to attack domestic environmental regulations. There is a concern that the threat of ISDS liability and costly damages will cause “regulatory chill”.That is, States will avoid adopting measures to combat climate change because of potential investment arbitration claims by foreign investors who are affected by the regulatory changes. However, the context in which environmental issues arise and the manner in which arbitral tribunal dispose of these issues has significantly evolved over the years. Recent developments point to ways in which investment arbitration may also be used to promote the goals set out in the Paris Agreement. This article highlights three instances of this phenomenon.

Renewables investors have invoked fair and equitable treatment and prohibitions on expropriation protections under the Energy Charter Treaty (“ECT”) to hold states accountable when they decide reverse course on promoting renewable energy investment. On February 15, 2018, in the latest award arising out of Spain’s photovoltaic investment disputes, a tribunal heldthat Spain breached its Energy Charter Treaty (ECT) fair and equitable treatment obligation through changes to its regulatory framework in 2013–14. The tribunal valuedthe investor’s damages at EUR 61.3 million. After initial losses in the Charanneand the Isoluxarbitrations, this is the second recorded victory for investors (the first being Eiser v. Spain, release May 4, 2017) in a series of claims brought by investors in the renewable energy sector against Spain.

Spainintroduced generous incentive systemsfor investments in the production of electricity from renewables in 2004 and expanded the investment scheme in 2007. This attracted a number of foreign and national investors and led to increased investment in renewable energy projects. However, these incentive schemes began to cause a tariff deficit (gap between the tariffs collected and the associated real costs) in the context of the financial crisis of 2008, and the Spanish government respondedby implementing cutbacks to the incentives through regulatory reforms in 2010, and altogether eliminating them through regulatory reforms in 2013 and 2014. These changes to Spain’s renewables scheme caused significant losses to investors, and has resultedin over thirty pending investment arbitration claims against Spain under the ECT and bilateral investment treaties (“BITs”).

Similar claims have been brought against Bulgaria, the Czech Republic, and Italy. In 2016, a NAFTA tribunal heldCanada liable for breaching the fair and equitable treatment obligation under Article 1105 of NAFTAwhen Ontario placed a moratorium on the construction of an off-shore wind power plant.

These sorts of claims reflect one way investors have used investment arbitration to coerce states into complying with their international environmental obligations. In the case of Spain, the damages arising out of the tariff deficit and ECT claims are now estimated to exceed $9.5 billion. This begs the question whether such tactics promote or undercut climate mitigation and adaptation in the long term. There is the risk that states will feel locked in to a particular means of achieving climate mitigation and adaptation goals despite later developments pointing to a different preferable method. Large-scale and high-profile cases such as the ones mentioned above, in which a nation is strong-armed by individual investors into following a course of action, are also prone to institutional credibility attacks. The European Commission has responded by launching an attackon the legitimacy of the ECT process. The long-term effect on the renewable energy market of such uses of investment arbitration are yet to be seen.

Beyond the energy context, there is precedent for state liability for other types of action/inaction in violation of environmental obligations which negatively affect foreign investment. In Allard v. Barbados, a Canadian investor who owns a nature sanctuary in Barbados brought a claim under the Canada-Barbados BIT alleging that the government of Barbados failed to take adequate measures to prevent environmental degradation that negatively affected the ecotourism value of his facility. Allard accused Barbados of failing to abide by its international obligations under the Convention on Wetlandsand Convention on Biological Diversity. While the claimant lost on the merits, the framework for analyzing such a claim that was set forth by the tribunal leaves the door open to future successful claims. For instance, with respect to Allard’s fair and equitable treatment claims, the tribunal states:


  1. What is determinative here is that Mr. Allard’s investment was conditional neither on any general expressions of positive environmental policy, such as those found in the 1986 Plan, the 1995 Cummins Letter, and the First and Second ARA Reports, nor on any representations concerning the management and operation of the Sluice Gate.


The tribunal then concludes that “the Claimant has failed to establish that: (1) Barbados made any specific representations to the Claimant; and that (2) the Claimant relied on any such representations in acquiring and developing the Sanctuary.” One could easily imagine a situation involving losses due to coastal sea-level rise where, given current science and flood-mapping, the legitimate expectations of the investor would be more likely to give rise to liability. Moreover, the tribunal in Allardset out environmentalist-friendly jurisdictional determinations. In discussing the legitimate expectations of Mr. Allard as a business-minded investor versus an environmental activist, the tribunal statesthat “expectations of an eventual profit were honestly held by Mr. Allard when establishing the Sanctuary in 1996 and thereafter, notwithstanding that during the sanctuary’s establishment and operations factors of profit were considered secondary in the background to his principal motivations of environmental and public purposes.” The tribunal additionally found unpersuasive the Respondent’s argument that Allard’s claims were for future, rather than actual loss or damages. In a sense, this decision is opening the door for claims brought by individuals for whom profit motives were only secondary, and for whom the harm alleged is potentially at least in part to be felt in the future.

There is also the potential for states to bring claims against investors under international treaties. These claims typically arise in the form of counterclaims, though a direct claim may be possible, if a treaty is interpreted to allow for it. In Perenco v. Ecuador, Perenco initially brought a claim against Ecuador due to changes in Ecuadorian legislation that allegedly violated its rights under an investment agreement. Ecuador launched a counterclaim against Perenco claiming that Perenco violated local environmental legislation by, among other things, failing to inform the state of several oil spills. According to Ecuador, these failures resulted in an environmental disaster in the Amazon for which the damages amounts to $2.5 billion. The tribunal issued a decision in favor of Ecuador’s counterclaim, but determined that ascertaining appropriate damages would require a long and expensive investigation, and encouraged the parties to settle. In a subsequent dispute involving a similar counterclaim by Ecuador against a different investor, the tribunal granted $41.8 millionto Ecuador in respect to its environmental counterclaim.

These recent developments reflect the evolving relationship between climate policy and international investment arbitration.


Leila Mgaloblishvili is a second-year J.D. student at Columbia Law School and a Staff Editor for the Columbia Journal of Transnational Law. She holds a B.A. from Columbia University, where she studied economics and art history.